Flex Ltd (FLEX) 2009 Q3 法說會逐字稿

Good afternoon, and welcome to the Flextronics International third quarter fiscal year 2009 Earnings Conference Call.

Today's call is being recorded and all lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

At this time, I would like to turn the call over to Mr.

Warren Ligan, Flextronics Senior Vice President, Investor Relations and Treasury.

Sir, you may begin.

Thank you, operator.

Good afternoon, everyone, and welcome to Flextronics conference call to discuss the results of our fiscal third quarter ended December 31, 2008.

On the call today is our Chief Executive Officer, Mike McNamara and our Chief Financial Officer, Paul Read.

The presentation that corresponds to our comments today is posted on the investor section of our web site under calls and presentations.

We'll refer to each slide number so you can click to the appropriate slide.

During the call today, Paul will review our financial results, which include working capital metrics, cash flow and return on invested capital.

Paul will also discuss the impact of the goodwill impairment charge and Nortel's bankruptcy on our financials.

Next, Mike will review the quarter and business outlook and provide guidance for the fourth quarter ending March 31, 2009.

After Mike's comments, we'll take your questions.

Please turn to slide two.

This presentation contains forward-looking statements within the meaning of the U.S.

Securities Law including statements related to revenue and earnings guidance, our expectation about our future cash flows and return on invested capital, the expected impact of Nortel's bankruptcy on our future operating results, and our expectations regarding our business in the current economic environment.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements, are based on our current expectation and we assume no obligation to update them.

Information about these risks is noted in the earnings press release on slide 22 of this presentation, and in the risk factors and MD&A sections of our later annual report as amended, filed with the SEC as well as in our other SEC filings.

Investors are cautioned not to place undue reliance on the forward-looking statements.

Throughout this conference call, we'll reference both GAAP and non-GAAP financial measures.

Please refer to these schedules to the earnings press release slide 18 of the presentation, and the GAAP versus non-GAAP reconciliation in the investor section of our web site which contain the reconciliation to the most directly comparable GAAP results.

Now, I'll turn the call over to Paul.

Thanks, Warren.

Good afternoon, everyone.

Please turn to slide three in the presentation.

Our third quarter revenue was $8.2 billion compared to $9.1 billion from the year ago quarter, represented a decrease of 10% reflecting the softness in end market demand as you might expect in the current macroeconomic environment.

Adjusted operating profit was $186 million compared to $300 million last year, Which was a decrease of 38%.

Adjusted net income for the third quarter was $127 million, compared to $250 million a year ago and adjusted earnings per diluted share was $0.16 compared to $0.30 last year.

Please turn to slide four.

Here we show each market segment's quarterly revenue, and percent of total quarterly revenue trended for the past five quarters.

Revenue for the infrastructure segment was $2.6 billion, which comprised 32% of total revenue and decreased 19% over the year ago quarter.

Slightly more than one-third of the year-over-year revenue decrease in dollars was attributable to Nortel, reflecting our planned reductions in business levels with Nortel.

Revenues associated with Nortel decreased from greater than 10% of consolidated revenues at one time to below 5% this quarter.

In addition, we've been actively reducing our low ROIC programs from our infrastructure segment, as we continue our focus on ROIC and asset velocity in this segment.

Revenue from the computing segment was $1.3 billion, which comprised 16% of total December quarterly revenue and only decreased 5% over the year ago quarter.

We continue to be very excited about the new program wins in this segment.

Revenue from the mobile segment was $1.5 billion, which comprised 18% of total revenue, and decreased 20% over the year ago quarter.

While our revenue has been negatively impacted by weakened market demand for some of our larger customers, the new product wins with new customers, primarily around smart phones, has helped to offset the eroding global mobile demand.

We note that this quarter's action did not comprise greater than 10% of our quarterly revenue, as they have in the past.

Finally, our industrial medical automotive segments and other category comprised 14% of our third quarter revenues, and grew 6% over the year ago quarter.

In light of the significantly deteriorating conditions in the automotive markets, I would like to highlight that our automotive segment represented a small percentage of the total revenues at approximately 2%.

We've made good progress in building the business over the past two years.

With the majority of our automotive business focused on the European premium OEMs, which limits our exposure to the North American auto industry.

In the December quarter, particularly later in the quarter, we experienced decrease demand across our entire business, as all of our market segments were impacted by the softening end market demand being driven by this difficult macroeconomic environment.

The current uncertainty in the global economic conditions is making it particularly difficult to demand and visibility remains limited for the near term.

We believe our end market model is a strategic advantage, and while it does not completely insulate us from the global broad-based economic downturn that we're experiencing now, we strongly believe that our diversified business model positions us to capture market growth opportunities when the macroeconomic environment improves.

Please turn to slide five.

Here we show the trend of declining concentration among our ten largest customers over the past nine quarters, which reflects our continued efforts to diversify our customer base and expand our product categories.

Our top ten customers not only account for approximately 48% of revenue in the December quarter and we have no customers accounting for more than 10% of revenue during the quarter.

We consider our continued customer diversification and lack of significant dependence on any one customer to be a strategic advantage going forward.

Please turn to slide six.

Adjusted gross margin of 4.9% and adjusted operating margin of 2.3% decreased 17% and 30% respectively from the year ago quarter.

On margin basis, both adjusted gross margin and adjusted operating margin decreased year over year by 1%.

Our operations were dramatically impacted by capacity utilization issues across most of our organization, resulting in significant under absorbed overhead costs.

Please turn to slide seven .

Adjusted selling, general and administrative expenses which include research and development costs as a percentage of revenue were flat at 2.6%, compared to last year on significantly lower revenue.

Adjusted SG&A dollars totaled $212 million in the third quarter ended December 31, 2008, compared to $231 million a year ago.

Discretionary spending remains a focal point of management, and as we have demonstrated in the past, we will continue to take the necessary actions to properly align our cost structures with respect to business levels which will improve operating margins going forward as the macroeconomic environment improves.

Please turn to slide eight.

Our cash conversion cycle improved to 18 days in the December 2008 quarter from 21 days in the September 2008 quarter.

We successfully reduced inventory by more than $900 million, which excludes the $98 million writedown associated with Nortel, and improved inventory turns to 7.7 turns in the December quarter, compared to 7.4 turns in the September quarter.

As previously discussed, inventory management continues to be a significant area of opportunity for us to further expand and enhance our working capital metrics and cash generation.

We believe that a cash cycle of approximately 20 days going forward is a reasonable target in this environment.

Days sales outstanding improved by two days sequentially to 35 days while days payable outstanding decreased by one day sequentially to 64 days.

We continue to critically monitor our receivables in light of the current economic conditions and we are pleased that our aging has not increased materially and that our days sales outstanding has continue to improve.

We believe that our tight credit and collection processes are functioning very well.

We remain intently focused on generating cash in the market downturn by further reducing the working capital required to run this business.

Please turn to slide nine.

As we have been highlighting, we remain intently focused on improving liquidity by driving further improvements in our working capital management.

As seen from the chart, we have successfully reduced inventory by approximately $771 million over a year-over-year basis.

And even more impressive was our ability to reduce inventory by approximately $900 million, excluding the $98 million effective Nortel impairment on a sequential basis from September.

This inventory management resulted in an improvement in our inventory terms over the past four quarters, which is now at 7.7 terms, quite rapidly decreasing revenues.

Our organization has been diligent and disciplined and our inventory strategy and execution of the supply chain, making changes both on the inbound and outbound end, driving further SMI and JAT activities and being more diligent in our MRP management.

We continue to believe there is further opportunity to expand and enhance the important metric, and continue to see further inventory reduction opportunities.

Please turn to slide ten.

This quarter marked the first period since December 2007 when Cap Ex was below depreciation, essentially driving cash flow leverage.

In previous quarters, we continued to make the necessary investments in our businesses to support new capabilities and expanding programs.

However, in the December quarter, we took decisive action to reduce capital spending to align with our anticipated near term demand.

We would continue to expect that this restriction in capital spending will continue in the upcoming periods, thereby providing further opportunity to generate cash flows and improve liquidity for the company.

Please turn to slide 11.

Our cash flow from operating activities generated $283 million in the quarter as we successfully reduced our net working capital, resulting rom significantly lower inventory balances, strong reductions in outstanding accounts receivable, despite realizing a reduced benefit from receivable sales in excess of $450 million and lower restructuring related payments.

This brings our cash flow from operations for the first nine months of our fiscal year to over $1 billion.

Cash payments for legacy restructuring and integrated related activity amounted to $84 million in the December quarter.

We significantly reduced our net capital expenditures in the quarter, down sequentially 50% to $73 million.

While total depreciation and amortization in the quarter was $133 million.

So, as a result of generating cash from operations and our reduced capital spending during the quarter, we generated approximately $210 million in free cash flow, which we used to help retire $260 million of our 1% converts at a $28 million net gain.

Year-to-date, we've generated $658 million of free cash flow.

We remain comfortable with our target of generating approximately $800 million in free cash flow for fiscal 2009.

But this still has a range around it given the continued lack of visibility.

We will continue to concentrate our efforts on reducing working capital and reducing capital spending, also lowering other discretionary spending in order to generate further liquidity.

Please turn to slide 12.

As previously mentioned, the key benefit of our ability to generate cash in this market is the opportunity to strategically strengthen our our balance sheet.

In the December quarter, we opportunistically reduced debt to a successful tender offer repurchase $260 million of our outstanding 1% convertible subnotes at a meaningful discount to par.

We remain focused on building liquidity and strengthening our balance sheet, and believe there is significant potential for us to further enhance our capital structure through a variety of means.

Please turn to slide 13.

At the end of December quarter, we had $1.8 billion in cash compared to $1.7 billion at the end of the September quarter.

As a result of the $260 million debt reduction from the tender offer, total debt was $3.2 billion at quarter end compared to $3.4 billion in the September quarter.

Net debt, which is total debt less total cash, was $1.4 billion at quarter end, down from $1.7 billion in the September quarter end.

The $5.9 billion goodwill impairment charge we will discuss in greater deal in a couple of slides.

As the effect of decrease in shareholder's equity to $2.1 billion, as a result, our leverage ratio which is calculated as total debt divided by total debt plus equity increased to 61% in the December quarter compared to 30% in the September quarter.

Excluding the impact of goodwill charge on equity, the adjusted leverage ratio would have been 28%.

Including the availability under our revolving credit facility, our total liquidity improves to $3.6 billion in the December quarter compared to $3.2 billion in the September quarter.

We believe this level of liquidity is more than sufficient to support our business.

Please turn to slide 14.

This graph shows our available liquidity plus debt maturities by year.

Our first maturity is due in July of this year, which is our $195 million privately placed convertible junior subordinated notes.

The next majority is due in calendar 2010, which is the remaining $240 million of 1% convertible subordinated notes.

After that, no additional significant balances of debt are due until calendar 2012.

We remain extremely company that the company, with its existing cash balances, together with its anticipated cash flows from operations and the additional liquidity available under its revolving credit facility, has more than sufficient liquidity to meet its needs.

We remain confident yet conservative in the management of our liquidity and we continue to believe we're operating our business while within the limbs of our financial covenants.

Please turn to slide 15.

As previously discussed, the challenging economy, the overall deterioration and equity values and the resulting sustained decline in our share price results in an indication of a potential goodwill impairment.

At our analyst and investor day on November 18, 2008, we announced we had commenced our good will impairment testing.

As a result of our recently-completed assessment, we recorded a noncash good will impairment charge in the amount of $5.9 billion in the third quarter results ending December 31, 2008.

The write-down represents the entire amount of the company's book good will.

It is important to note that this impairment charge does not impact our cash flow, liquidity position, availability under our credit facilities or financial covenants.

Please turn to slide 16.

We view ROIC as one of the key metrics to managing our business and it is a good level of success we're having in managing our capital.

It is also an indication of the varying levels of margin and asset velocity considered when establishing expected returns on existing and new customer business.

Our ROIC for the December quarter was 11.5%, calculated used our normal methodology when we divide the tax-effective pro forma operating profit of the quarter by the average of the net invested capital of the current and prior quarter end.

The average net invested capital base includes the impact of December quarter write-down of good will.

Also shown in this chart is the ROIC trended, calculated excluding good will and the net invested capital base on a historical basis for comparison.

Under this methodology, ROIC for December quarter would have been 22.2% and in the mid 20% range in the previous four quarters.

Please turn to slide 17.

As a result of Solectron acquisition in October 2007, the company identified they had significant concentration of business with Nortel.

And has since been actively working to reduce the level of business.

As seen from the chart, our December 2008 quarterly revenue amounted to $387 million reflecting a 37%, or $226 million reduction in quarterly revenues from $613 million in the year ago quarter.

On January 14th, Nortel announced bankruptcy protection filing.

While Nortel works their way through their restructuring process, we remain supportive and engaged with them as a strategic supplier.

We amended our relationship agreement with them to address our status as a strategic supplier as well as to establish certain contractual refinements.

The amendments resulted in our contractual agreement to receive $120 million for certain inventory over the following six months, of which we have already received $75 million.

Additionally, in support of our continued assets of the strategic supplier, we have secured five-day payment terms on all post-bankruptcy petition sales of product.

It is also important to note that Flextronics has been selected to serve as a member and chairperson of the official committee of unsecured creditors of Nortel in its U.S.

chapter 11 case.

In connection with Nortel's bankruptcy filing, we have recognized a distressed customer charge of approximately $145 million, which is comprised $47 million of provisions for prebankruptcy petition and accounts receivable, and $98 million for the write-down of inventory.

In developing these provisions, we considered various mitigating factors, such as existing Nortel-related provisions, offsetting obligations from Nortel and subject to administrative priority claims.

It is important to recognize the considerable amount of judgment required to assess these exposures as we're in the early stages of bankruptcy claims process.

We have used our best judgment to determine the appropriate reserve levels based on the information currently available.

Management will continue to monitor and refine its estimates if and when better information presents itself.

We continue to proactively and regularly monitor the financial stability of our customer base and we have reduced credit limits and payment terms for certain customers.

We do not believe there are any other distressed customer exposures at this time but we cannot fully predict how the economic slowdown will impact our customers in the future.

Please turn to slide 18.

The December quarter GAAP results reflected a good will impairment charge of $5.9 billion, the impact of the $145 million distressed customer charge associated with Nortel and a $28 million gain on the extinguishment of the $260 million of our 1% convertible subnotes as a result of our tender offer.

Also, during the 2008 quarter, the company recognized after tax intangible amortization and stock-based compensation of approximately $30 million and $19 million respectively compared to $21 million and $16 million respectively in the year-ago quarter.

After reflecting these items, the GAAP loss was $6 billion, compared to $774 million in the year ago quarter.

GAAP loss for per share was $7.43.

Thank you, ladies and gentlemen.

As you turn to slide 19 and 20, I will now turn the call over to our

Thanks, Paul.

A continued flowing of the global economy dramatically reduced demand across virtually every product category, and every geographic region we operate in, creating one of the most difficult economic environments in our history.

While December quarter revenue of $8.2 billion and adjusted earnings per share of $0.16 were within the guidance range we presented at our analyst day on November 18, 2008, this was our first December quarter since 1996 where revenue declined sequentially.

As we progressed through the quarter, reduced customer spending, limited access to credit and all of the other effects of the macroeconomic environment weighed heavily on demand.

During November, we experienced an accelerated impact of these deteriorating demand trends, which are continuing as we enter the March quarter.

The overall realities of this market are certainly sobering, as new business wins have not outpaced the decline in revenue.

We continue to build our organic pipeline as well as focused on emerging markets.

We will also continue to execute on our diversification strategy, which we believe lessens the impact of the challenging end market demand.

And in particular, our customer exposure.

As evidence of our ability to further execute on our diversification strategy, our consumer exposure over the last two years has gone from 59% to 38% this quarter.

Our scale and breadth of service offering has greatly expanded our available markets and customer opportunities, and has aided our ability to further develop our infrastructure, industrial, medical and computing businesses, which has helped to mitigate the overall eroding demand environment.

Our top priorities in this environment are to control costs, improve internal efficiencies, reduce inventory levels, aggressively manage working capital, generate strong cash flow and improve our capital structure.

These times are unprecedented.

Our ability to execute on these controllable aspects of the business is paramount as a market leader.

This quarter will be even more challenging as the economic environment will remain uncertain.

We will be additionally affected by normal March quarter seasonality.

In this market, our objective is to skillfully leverage our strength and control we can.

We're in a stronger competitive position as we emerge from this downturn.

Our key strengths include an experienced management team that knows how to deal with the dynamics of a weakened market.

We understand that disciplined execution is vital.

We have many long-standing customer relationships, which provide a strong foundation for our business and our significant worldwide scope and scale provides them with competitive advantages.

For example, our low cost industrial parks, vertically integrated end-to-end solutions help us to efficiently manufacture a wide variety of products.

To minimize the impact of market fluctuations, we have aggressively invested in our diversification strategy across customers, end markets and geographies.

In addition, we have a strong balance sheet and the ability to generate cash flow.

To strategically and effectively navigate for this period, we have implemented numerous actions that include proving the ROIC performance of underperforming projects and accounts, intensely focusing on driving inventory balances down, significantly reducing head count, implementing factory shutdowns, shorter work weeks and selected site closures, and forcing strict cost controls across the entire business.

Managing the controllable aspects of employee compensation.

Limiting capital spending to around 50% of the current depreciation levels, and substantially reducing R&D spending.

As we entered the December quarter, we averaged close to 25% overtime and a 30% temporary work force worldwide.

This planned flexibility is proving to be invaluable as we ramp down our system.

We closed December quarter at approximately 12% overtime, and reduced temporary head counts significantly.

We have substantial progress with our execution focus in the December quarter.

Our adjusted SG&A spend went from $222 million in the September quarter to $212 million in the December quarter, as we continued to reduce discretionary expense level.

Inventory reduction was superb, as we reduced the balance by more than $1 billion, and achieved increasing inventory turns in a deteriorating revenue quarter.

We reduced AR sales by over $450 million in the quarter, paid off $260 million in debt, And still managed to increase cash balances by $95 million.

Our cash cycle improved again as a result of these many activities.

While the Nortel bankruptcy is disappointing, we're having some success working the best of a difficult situation.

We agreed on a $120 million payment for inventory, and we have already received $75 million in cash to date.

We're fully supportive of continuing to build Nortel products and have agreed to receivable terms of approximately five days.

The Nortel supply chain continues to function almost as it did prebankruptcy, and without disruptions.

We're hopeful that Nortel will be successful in its turnaround efforts, and we're assisting in every way we can without compromising our company's financial position.

I will now comment on each of our end markets to provide you a little more color on how we see the business evolving in this very difficult environment.

Our infrastructure business remains extremely competitively positioned, and we have a well diversified portfolio and strategically aligned with key customers on their major programs and have significant traction on the next generation products.

While revenue has decreased as a result of reducing our exposure to nonperforming accounts, as well as a reduction in Nortel revenue, we are very confident of our market position within this segment.

We anticipate that this segment will perform better than most other categories under the course of next year, and be less susceptible to the market downturn.

Additionally, we expect to increase market share as a result of the high level of competence we have in this segment.

We're experiencing some mild contraction in the medical segment, but remain confident in the business as we have a very strong pipeline.

We're exceptionally positioned with a broad service offering within the segment and expect to capitalize on increased outsourcing opportunities developing within this space.

While our core computer business is slowing, our notebook business continues to win new programs, and will provide solid revenue growth as these programs ramp in the back half of the year.

We continue to be optimistic regarding the potential in this segment as we continue to make positive progress with customers.

Industrial segment is comprised of capital equipment, meters and control, test equipment, solar products, appliances and other miscellaneous products.

These product markets are all contracting, but new opportunities will continue to open up in this segment as outsourcing becomes more strategic for these manufacturers.

While near term demand will be down, we strongly believe we will win more than our fair share of these new business opportunities as a result of the strength of our scale and breadth of services in this segment.

Clearly, the impact from the U.S.

and global consumer spending is having a significant detrimental impact on the consumer market.

All sectors of the consumer market from LCD TVs to gaming to print and copy are off substantially.

We do not see a significant rebound in this market in the near term.

We would expect a significant decline in business as a percentage of the total flex revenue over the next few quarters.

While we're generally disappointed in this segment, we're pleased more stable segments will become more representative of Flex' diversified revenue model.

The opportunities in the mobile segments have contracted.

Several traditional customers have reduced demand significantly, and the overall market is slowing.

Smart phones and phones are the dominant things for business growth in the future.

We're growing nicely with the major smart phone manufacturer, and currently producing on multiple continents, which is offsetting much of our midrange phone demand reductions.

There is significant churn in our business model due to simultaneous start-up costs and shutdown costs.

We're focusing on selling printed circuit boards, camera modules and chargers into all of the mobile product categories.

The automotive segment demonstrated encouraging growth over the last several years, but represents only about 2% of our revenues and is primarily focused on ODM products for the European customers.

Visibility is limited due to extended shutdowns at the tier one car companies over the holidays, but we like our model and our pipeline of sales opportunities remains strong, as the electronic content of the cars is expected to increase.

While each of these markets will present different challenges for us in the near term, they were also creating abundant opportunities.

Next, I would like to share our guidance for the March quarter.

Please turn to slide 21.

We expect March quarter revenue to be between $5.5 billion and $6.5 billion and adjusted earnings per share to be in the range of $0.02 to $0.07 per share.

The wider range is the result of continued uncertainty in the end markets, product mix and the deteriorating demand environment, which makes forecasting difficult at best.

Even in our normal business environment, the March quarter is challenging to forecast.

This is especially the case now, given the unusually low levels of visibility that many of our customers have in the current environment.

Many of our customers had extended shutdowns over the holidays.

But we anticipate that the current demand picture that is reflected in our current forecast will be further refined in the coming weeks.

All of these issues make the March quarter a most difficult quarter to anticipate and as a result, we have given another wide range for guidance.

Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.05 for intangible amortization expense and stock-based compensation expense.

In closing, as we all know, we're in the midst of one of the worst macroeconomic environments.

There is not one industry or one customer that is immune to this global demand slowdown and the financial impacts attributable to it.

This deteriorating demand environment does pose significant challenges, but we're pragmatic about the challenges we're facing, and we're confident in our seasoned leadership to appropriately react, execute and deliver in this environment.

We strongly believe that our competitive strengths include our low cost industrial bar concept, vertically integrated end-to-end solutions, significant scale, customer and end market diversification and long-standing customer relationships, which will enhance our competitive positions in these uncertain times.

We believe our product and service offerings create value that increases our customer's competitiveness, which is extremely important in this current economic state.

We remain focused in our efforts to strengthen the balance sheet and build liquidity.

We believe that our existing cash balances together with the anticipated cash flows from operations and our availability under our revolving credit facility are more than sufficient to fund our operations and support our business opportunities.

We're confident that we will emerge from this downturn as an even stronger company.

I will now turn the conference call over to the operator for questions.

We ask that you please limit yourself to one question and one follow-up.

Thank you.

(Operator Instructions).

The first question comes from Brian White from Collins Stewart.

Your line is open.

Yes, good afternoon.

When we look at the inventory decline was pretty phenomenal in the quarter.

Maybe you could talk through what you did to drive this decrease.

Are we going to see further decline in the March quarter?

Yes, we were really, really pleased with the results and all of the hard work that went into that.

A lot of it was -- we actually pulled out a recessionary play book from 2001.

We learned a lot back then about how to drive inventory out, I think back in 2001, it took us about four quarters to go figure it out.

But there were a lot of techniques that we implemented to go make that happen in terms of how we managed our MRP, collaboratively working with the customer to understand what the demand patterns are, and it is kind of a funny thing but we actually worked with our customer last quarter to push demand down.

Which sounds kind of crazy, but we actually continuously challenged what our customers were going to load, because I think we were perhaps a little bit more negative than our customers were, and didn't want to be left holding with too high inventory level.

So, anyways, between working with the customers and actually implementing a lot of the things we learned over a one-year period in 2001 about how to plan safety stocks, how to manage lead times, how to load the MRP system, it just created a very, very good result for us.

And do we expect it this quarter?

We do.

So, we're doing the same thing.

We're pushing it down and I would expect to see continued improvement in turn.

When we look at capacity utilization in the December quarter and maybe what you're looking for in the March quarter, and just also, was there downsizing in the December quarter of head count and maybe what you expect in the March quarter?

Yes.

So, there was -- yes, significant downsizing.

I think I mentioned we put a pretty flexible base and we did this years and years ago.

And so our ability to flex down pretty rapidly is high.

So, there were a very, very significant amount of reductions in the hours worked at Flex.

So, already last quarter, we put in PTO, forced PTO, we shut down factories, we put people on shorter work weeks.

We had a significant amount of layoffs which included a lot of temporaries.

As mentioned, we reduced the overtime hours very, very substantially.

But between all of that, we were able to react pretty aggressively.

So, I would say that all of those different items were significant, were very active, were put in really across the board, and really in just about every geography.

For this quarter.

We're rapidly responding to what the market place is presenting to us.

What type of percentage decline did we see in the work force and also capacity utilization rate, what you're looking for.

Yes.

The capacity utilization rate comes up a lot.

There's three different kinds of utilization.

There's really the factory utilization.

There is the equipment utilization, and then there's the people utilization.

And the factory utilization being the least important, the physical space.

It runs well below 1% of sales and that's real hard to flex obviously.

The equipment runs between 1% and 2% of our total place and that also is difficult to rationalize in a short order alternatively.

These are typically on anywhere from five to seven year depreciation cycles.

About 20% burns off a year.

And the third thing is people which makes up the big amount.

And our objective is to directly respond to the market place orders with reduction in hours and those could be, like I said, shorter work weeks, they could be PTO, they could be outright layoffs and they could be overtime.

So, it is really a combination of all of those things.

It will be our objective to flex that directly to the revenue enhance.

Again, it takes a quarter really to have that flow through and there is a cost for that.

Mike, do we have a percentage kind of maybe on equipment that we're looking at here?

Well, I think the way to think about it is we came off the September quarter doing 8.8 so we had enough, or $8.9 billion.

So, we have enough equipment to do 8.9 billion of sales.

So, if you think the midpoint of guidance now at $6 billion, it directly translates.

Ok.

Thank you.

the next question comes from Jim Suva from Citigroup.

Your line is open.

Thanks, Mike.

Have you seen any changes to your OEM customers as far as pricing, what they're asking for, some insourcing?

Are they asking for better terms now that there is a lot of excess capacity out there and some don't have the financial position you do who might be struggling more for business.

Those are a lot of things in that one comment, but the answer is we're seeing some of everything.

Certainly in terms of aggressiveness in the market place or maybe I'll start with terms from the OEMs, new OEMs always ask us for better and better terms, and lower and lower prices.

Is it more difficult than it was in the past?

maybe not.

I do find that the overall environment is becoming more competitive.

I think that competitiveness is actually more challenging in the consumer and mobile space probably than it is in other product categories.

But we're starting to see an increased amount of competitiveness, and I don't know if it is driven as much by the OEMs as it's driven by some of the excess capacity of the contract manufacturers.

So, I think that's part of it.

I think without question, we are -- people are asking for terms, but at the same time, we're kind of asking to improve the terms.

Kind of simultaneously as we look at the credit that we extend through our -- through AR, we're actually working to reduce that risk, and kind of go in the other direction.

So, I think while people might ask, I think people also understand it is a difficult credit market.

I don't expect to see much movement at all as it relates to concessions to the OEM in that space.

Ok.

A quick follow-up for Paul.

Paul, there's kind of been no restructuring charges for this quarter but with your run rate of sales at this or what it is for the March quarter, do you have to institute another restructuring program given your size, relative to where the demand is?

We actually -- we continued to react to the demand signals that we have and align our cost base.

That goes on daily here, day in and day out and so we continue to do that.

There was, in terms of cost, there was an insignificant amount spent in the December quarter, and there is an insignificant amount planned in the March quarter.

However, we're still waiting for demand signals to settle down, to understand the new levels of run rate for revenue and should that mean that we have to take, do something more sizable then we'll inform you but we have nothing of that magnitude in mind at this stage.

Great.

The other thing to think about, too, Jim is think about we're running a close -- a 25% to 30% overtime level.

And we're running a 25% to 30% temporary work force worldwide.

And you think of that base of flexibility on top of 200,000 people.

That's an enormous amount of flexibility to get at with very low cost.

That's what we did.

We reacted very significantly last quarter.

The numbers were extremely high.

But the cost of it, as a result of putting in that flexibility is not so high.

Now, as we get into more and more challenges going forward, if that base continues to erode, the cost of that flexibility gets higher and higher.

We'll have to reevaluate what our position is.

But so far, we've been able to react effectively without doing anything major.

Ok.

And housekeeping, why is stock comp going up year over year?

That's a good question.

I wish I had the answer at hand but I'll certainly follow up with you later on my call.

Thanks, gentlemen.

Next question?

next question comes from William Stein from Credit Suisse.

Your line is open.

Thanks.

I think a lot of investors have been interested in the financial covenants.

I understand there are two maintenance covenants that have been concerning people.

Last time you guys talked about how EBIT, or EBITDA rather was down about 50%, you would still be ok.

Can you talk about how you view that today?

And also what you would have to see in terms of both potential write-downs and declines in EBITDA in order to have any trouble on the covenants?

We ended the quarter well in compliance of our covenants.

And very comfortable with that, especially having taken out some more debt as we noted.

Going forward, it is all a matter of earning levels and we're not prepared to talk about that at this stage.

However, we've modeled certain scenarios out and we still remain within compliance and we're not concerned about it.

So, I think you understand the detail of the calculation but it is something that of course we pay close attention to, and the good thing is the business is generating significant cash in the downturn that is helping us with our liquidity and net debt, and our ability to be opportunistic in the Capital Markets.

So, that is where we're at with that.

Perhaps I can try it a different way.

If you saw the current quarter come within your guidance range, or maybe at the low end, no meaningful rebound over the past few quarters and profitability at the same level as well, do you think there is any chance of tripping one of the two covenants?

No, there isn't.

And that's certainly something we model and pay close attention to.

Great, thank you.

next question comes from Amit Daryanani from RBC Capital Markets.

Your line is open.

Question on Nortel.

When you guys bought all of the Nortel assets several years ago, I think you had 5% manufacturing side, you might have closed one or two of those.

Could you just talk about the remaining sites that are left?

Is that the Nortel centric business and you have to shut them down in the near term?

Yes, we actually have out of the original base, we have one factory left in Calgary.

There's quite a bit of other work in there at the moment, and we've been downsized in that factory probably like for three years.

I would call it on a planned phase down and so we have very little left in that.

We don't own the factory.

We have several hundred people and it has been on a very planned phase-out.

Anything else we bought from Nortel has been closed.

All right.

And then I'm not -- curious of the reality for Flex at this point given the macroenvironment becomes, it's a $24 billion, $25 billion annual revenue company.

Do you think that you guys have the cost structure to sustain 3, 3.5% EBIT margins on that kind of run rate and if not, can you talk about what restructuring you would have to do to get there?

Yes.

So, it again depends on mix and exactly what is that business made of, but it would certainly be -- I mean how we look at the business is that it is going to be $6 billion this quarter or thereabouts.

This downturn can last a long time.

We don't know what it is going to be like in the future, but we certainly have to anticipate that there's going to be an extended downturn of business, just so say the new base of $6 billion and we feel that we just need to adjust to that base and then start working it back up 2% or 3% levels.

That's a new level.

And we think we can get there.

But again, it depends on mix and it depends on how fast we can get there.

It is certainly our intention to reset our company to the new lower level and then start grinding it back to 3 points.

We think we can get there, it is like yes, we have to be able to get there.

Mike, what I'm trying to think about this, can we get there just on an organic basis or take some outside restructuring charge to achieve that at some point?

It kind of depends on what the mix is, but if we were going to stay flat at $25 million, we might accelerate it.

Getting to the 3% or 3.5% level by taking some charges.

I mean that's a possibility.

But we would really have to see what the mix is and really decide on what the overall level is going to be.

But the answer is again, you get there faster by doing restructuring but then again, we want to be thoughtful and careful about what we restructure and what we don't.

Like I said, I outlined a huge ability to respond down on the highest cost element which is our labor.

So, I think it just -- it just depends.

But what I can assure you of, for sure, we think there is a new level, for sure we need to adjust down to it, and for sure, we have to run our business to get back up to 3.5%.

We'll find a way to go do that.

Fair enough.

Finally for me, on the SG&A line, $212 million this quarter, how much of that is variable versus fixed?

I'm trying to get a sense of next quarter, with down 25%, what kind of SG&A run rate should we think about?

The variable run rate essentially is the R&D spend out of that number which typically runs around 20%.

And the rest of it is pretty fixed.

Perfect.

Thanks a lot, guys.

The next question comes from Alex Blanton from Ingalls & Snyder.

Your line is open.

Thank you.

Going to continue on the income statement here.

If you take the midrange of your EPS guidance and work back up, using interest cost of $54 million, 4% tax rate, about 1.5% operating, EBIT margin on $6 billion, midrange sales, and that's $92 million and if you assume $200 million in SG&A, down $12 million.

You get $292 million for gross profit which is virtually the same gross margin, 4.88 as you had in the third quarter, despite the fact that your sales might be down 22% sequentially.

How do you do that?

And does it have anything to do with the fact that you must have had a big impact on absorption from reducing inventory by $1 billion because -- well, $900 million adjusting for Nortel and if you adjust let's say that the impact is 10% of that, that would mean that before inventory liquidation costs like that, under absorption, you actually would have maintained -- you would have had about a 5.9% growth margin in the third quarter.

So, is it the absence of the huge inventory reduction that allows you to hold a gross margin like that on a big volume decline, or is it the mix or what?

Maybe I'll take those one at a time.

I've got one more question after this but it is a short one.

That's great.

So, first question, gross margins coming off December going into March.

You're right.

If you model it out, it roughly stays flat on a gross margin percentage basis.

That's reflective of our accelerated activity that's taken out costs.

That has enabled us to maintain gross margins at those levels.

We've been, as Mike said, been very proactive at taking down the labor costs.

Which is the highest cost driver with the variable cost component.

So, and we continue to do that through a much lower revenue base in the March quarter.

That was the first part of it.

The second part of it, I didn't quite understand, because taking out inventory hasn't necessarily reduced or doesn't have an effect on absorption.

It means that you produce less than you sell which always affects your absorption if you are absorbing cost of inventory at all.

It depends on how much -- the amount that it affects depends on what percentage of your fixed cost you absorb in the inventory.

But if you don't sort any into inventory, there is no effect.

That's true.

It goes back to the first point of how we absorb the overhead costs which has a lower revenue base and maintain the 4.8%, 4.9%.

That's the largest driver of that is the labor cost which, as you say, absorbs an inventory is typically how you do it.

And so having reduced the labor cost substantially, it enables us to maintain that margin percentage level.

Ok.

All right.

Second question, which is shorter, is at your November 18th meeting, you pointed out that there was a provision in your 6.5% bond that would be triggered by the impairment charge and that would prohibit you under that provision from repurchasing stock.

And so that you were not able to repurchase stock even at the depressed level that it was, and got to after that meeting and still is.

So, but you thought that there was going to be -- there could be a work around of this or a renegotiation of it or whatever.

So, how do you stand now regarding possible repurchase of shares under that provision?

Can you do it or not?

Right now, Alex, we cannot.

What it is, as you rightly point out on the 6.5, it is the actual restricted basket issue and therefore, until that basket becomes positive or the issue is resolved, there wouldn't be any allowance for repurchase of our shares.

But is it under negotiation?

To change that?

It certainly is within our thoughts and plans to address this issue.

But --

You could buy a lot of stock at the current price.

Absolutely.

It is a real shame you can't do it.

Well, yes.

You have got to tell the rest of the guys on this call, Alex.

All right.

Sorry.

Go ahead.

I didn't mean that.

You're right, Alex.

It is all part of our ability to manage the capital structure and we've been working on the debt repurchase as you know.

We will want to make sure we have a balanced approach going forward and any restrictions that we have will either decide to live with them or decide to remove them.

So, that's in our daily planning for sure.

Ok, thank you.

The next question comes from Matt Sheerin from Thomas Wiesel Partners.

Your line is open.

Thanks.

I just want to go back to the outlook commentary in your guidance, which is a wider range and we certainly appreciate that given lack of visibility but is this going to be -- need to be a very back-end loaded quarter in order to get even to the midpoint of your guidance?

And just sort of as you started the quarter, Celestica last quarter, for instance, say they had a big order drop-offs in the month of January.

Is that how your quarter started out and will have to be more back end loaded?

No.

I don't think so anyways.

I guess that's hard to say because we can't predict the future.

But our quarters typically are not very back end loaded.

And I think the behavior that we saw in early January was not much different than we anticipated in December to tell you the truth.

So, actually I don't think there is a meaningful change.

In fact, there was such little change in our order book in January that maybe we were just already discounting what ended up coming in January which is a possibility because like I mentioned earlier, we were aggressive with our customers and pushing those forecasts down just because we didn't believe in the future and we didn't want to get stuck with the inventory.

And so I think there is a -- the other key thing that I think that we're missing some to mandate is on is we're actually two-cycles out of the real demand sell through.

So, in other words, we sell to Sony who sells to Walmart, so we have to get Walmart's data to go to Sony then for us to load our schedule.

The same thing, when we sell to Cisco, we have to wait for Verizon to give us the orders for Cisco.

And to me, there are so many people on extended shutdowns over the holidays that I actually questioned how much good data really came out at the beginning of January.

I think there's more data to come out that we need to understand but I don't think the first two weeks in January, we did hear that but I don't think the first two weeks was anything different than where we anticipated and perhaps it was just because we already were judging our forecast down.

Ok, thanks.

That's helpful.

Then just on the inventory, good job obviously in December.

With the big revenue drop-off in March.

Can you keep at that turns level or should we expect inventory days to go up a bit in March?

We'll for sure expect them to go up.

Every March quarter, we have a pretty good clip up in inventory days.

It is hard to react.

Just the way we do the inventory calculation, everything else, it is pretty much impossible to react down 25%.

So, what we'll do is we'll give a good, hard run at driving as much inventory as we can out in March and then I think the balance will right itself in June and I think by then, I actually hope to be at a stable base.

Granted, it is probably a lot lower number than we had last June.

I mean, a new base of revenue that is.

And I would expect it to be a little stable.

During this adjustment period, we're going to see the inventory turns, the inventory turn days go up.

Even in a good environment.

Ok, thank you.

Are you ready for the next question?

Yes.

Next question is from Steven Fox from Banc of America.

Your line is open.

Hi.

I'll be quick.

I just was curious how you would gauge the chances of recovering some of the $145 million charge with Nortel in the future.

Since we've actually taken a provision, the distressed customer provision, we think the chances are pretty small.

And that's why we took the reserves.

And if -- we'll get new information, I'm sure as we go through, particularly being on the credit committee, but that will take a long time.

But I think for now, we have to assume that that's a low probability of that happening.

And then the chances of other charges are zero-based on the agreement you've reached now with Nortel.

Well, it is never zero.

It is a significant amount of judgment that goes in to establishing a reserve.

Elsewhere, hoping that Nortel comes through this process.

There are other possibilities and -- that could end up being negative for all parties related to this.

But we're not planning for that.

We're planning for them coming through it.

And we think that the reserve that we took would be adequate.

Thank you.

Next question comes from Shawn Harrison from Longbow Research, your line is open.

Good evening.

If you look out over the next 12 months, I know there's extremely limited visibility, but if you could maybe quantify by each end market that you serve, kind of the run rate of revenues and what you're expecting in terms of decline and then on top of that, are you also pruning out additional low margin business as we look over the next few quarters?

Yes, we are.

We are looking -- and we have been doing that for -- I think we first went to discuss it with you guys, I think it was back in June or July time frame where we said that it would be our objective now to generate cash and because there is a lot of opportunities of what to do with our cash.

We believe the build out of our company was pretty complete.

We've been on that mode for a little while.

We're seeing some of the reductions.

We've seen a lot of reductions already.

We're continuing to work it.

In this environment, our cash is very important to us and we're making sure that we earn on it.

Otherwise we shouldn't be spending it.

So, we're pretty tough on our team and working that very, very hard.

So, it is not just a low margin either.

But really, the ones that are consuming a lot of networking capital which is just as much a focus as the low margin accounts.

It is really both.

At the end of the day, it is the return on invested capital.

Ok.

Then the earlier part of my question, just in terms of trying to size the declines potentially over the next 12 months in terms of a run rate by end market.

Yes, that one is really a tough one.

And as you know, we don't know.

We're not close enough to our customers end demand to be predictive about that.

I think, for us, and what we see in terms of the markets, I mean we're very bullish about medical.

That we think more and more outsourcing opportunities are coming out of this environment.

And it is an industry that's very reasonably new in terms of outsourcing.

We think that's a big upside and in general, we think the infrastructure business will be down, but we also think relative to the other businesses, we think that's going to be a strong point.

Or stronger.

Maybe it will go down less.

Maybe the way to describe it.

But we really don't know what the end is going to look like.

Ok.

And then maybe just another question kind of in the general scheme of things.

What are you looking for right now to indicate you're seeing a bottom in demand.

Is it a stopped negative order revisions?

Is it something else in that sense?

I wouldn't say we've seen a bottom.

Like I said, I actually think we need more data to see whether there's another clickdown or if it has stabilized.

I do actually kind of hope that this quarter, we'll know what the bottom looks like.

I'm not sure if that's true.

I think there are a lot of people on vacation and a lot of new data that needs yet to come out.

So, I'm actually not bullish that we've seen the bottom, but we don't know.

But I think we just have to be very, very reactive to anything else that comes at us, but hopefully we will see the end of the downcycle this quarter.

It would be nice to see.

Thank you.

The next question comes from Sundar Varadarajan from Deutsche Bank.

Your line is open.

Thanks.

A couple of questions.

When you think about margins for the next quarter, one negative obviously revenue decline, how should we look at mix as impacting margins over the next couple of quarters given that most likely consumers are going to underperform your other higher margin businesses.

Yes it is a difficult question and you're right.

We could easily see a decrease in the amount of kind of higher volume, lower margin programs.

But simultaneously, we're also happy to adjust our profit where our cost structure simultaneously with the new revenue levels.

So, you've got a lot of effects going on somewhat simultaneously.

It is really difficult to sort through at this point.

We also have a lot of ramp-ups.

One of the problems we talked about last call is our mobile business looks kind of reasonably flat year on year.

Alternatively, there is a lot of rampdowns in one region on one type of phone and a lot of rampups in another region with another type of phone.

While the revenue looks reasonably stable, it also comes with a cost.

So, I think between all of those effects in the uncertain economy, we're not really -- I don't think we can actually forecast exactly what our margins look like, only to say that we just have to respond as rapidly as possible and it is our objective to start working this thing back up to three points.

A couple of questions on the cash flow front.

How should we think of Cap Ex for over the next few quarters, and how much cash restructuring payments do you have from some of your older restructuring initiatives?

So, from a Cap Ex perspective, I can tell you what our internal targets are as we ratchet the spending down, it will approximately be roughly 50% of depreciation.

So, approximately $50 million a quarter.

Ok.

From a restructuring cash perspective, we have approximately $177 million left and about $71 million of that comes out in March.

And then it is about 30 in June.

And after that, it is roughly $10 million a quarter for a few quarters until it runs out.

Just one more question on your AR securitization, could you just give us what the outstanding -- I think you have like three different AR facilities.

What was the net balance net of receivable -- net of retained interest at the end of the December quarter?

It is roughly $800 million.

Great.

Thanks.

Ok, so I think that's it.

Yes, we would like to thank everybody for participating on the call.

We'll look forward to talking with you next quarter.

Thanks very much.

Thank for your participation in today's conference call.

You may disconnect at this time.